Report on panel discussion
PANELLISTS’ STATEMENTS
Maria Teresa Fabregas Fernandez, European Commission
The revision of the Markets in Financial Instruments Directive (MiFID) initiated in 2011 is
necessary in order to improve transparency and stability on the markets, making sure they
serve the real economy, and to improve investors’ confidence. In particular, the Commission
introduced new requirements for firms and venues using High Frequency Trading (HFT).
First, on firms, we strengthened provisions on authorization and supervision, and inserted
effective risk controls. Firms should also be actively involved for example by putting in place
proper monitoring regimes and annual reporting systems, and by flagging algorithms used to
the relevant competent authorities. More than anything, it is essential to ensure that high
frequency traders act in a responsible way and provide much needed liquidity to the markets.
Second, the revision also provides for new requirements aimed at trading venues. These
include the implementation of circuit breakers, and of effective procedures to ensure
resilience of systems and orderly trading. Venues should be able to monitor orders and
abusive behaviours through limiting ratios for unexecuted orders and systems to limit tick
sizes. All these new measures shall be effectively monitored and supervised by competent

authorities. In parallel, the revised Market Abuse Regulation (MAR) will allow authorities to
detect and sanction any possible market abuse performed with HFT strategies.
The European Parliament has adopted its position on MiFID II last October. It is now awaiting
the Council to reach a General Approach for starting trialogues discussions.
Ari Burstein, ICI and ICI Global (represents the « buy-side »)
The Investment Company Institute is the national association of U.S. investment companies,
including mutual funds, closed-end funds, exchange-traded funds (ETFs) and unit investment
trusts (UITs), representing the interest of millions of shareholders.
Technology in general, not only HFT, changes the way the buy-side trades: for example
through increased fragmentation in the market place and different types of trading venues
available. But contrary to public opinion, the issue if not black and white. HFT strategies have
some positive aspects such as the provision of and tighten spreads. But there are also a
number of concerns for the buy-side and its members. First of all the increased number of
cancelled orders on markets includes a number that are sent with no intention ever of being
executed. Even though this is not a new phenomenon, technological progress has facilitated
these practices, which should be effectively addressed in legislation. Another new concern
relates to the increasing number of orders’ types (especially in the US), which add complexity
and are increasing volumes but not liquidity! On this, more robust approval processes could
help address the issue.
The buy-side strongly encourages legislative developments, and is willing to support
regulators in this exercise. The best situation would certainly be that the sell-side itself makes
efforts to fix the problem, but unfortunately this is unrealistic as there are not enough
incentives for that.
Juan Pablo Urrutia, ITG
In the context of current revision of financial regulations (especially MiFID and MAR), the
European Securities and Markets Authority (ESMA) has already published guidelines on
algorithmic and electronic trading. One of these obligations is to have monitoring in real time.
The revision of MiFID goes much further and raises three concerns for us and the buy-side:
1. The requirement to impose market making obligations on market participants. The
issue, on which the EP and Council seem to have different views, will be on whom
the obligation falls; whom is considered to be a “market maker”.
2. The requirement to disclose algorithms. While the Commission leaves the option to
member states, the EP requires detailed disclosure in its final text. This raises
questions and possible concerns at three levels: a) whether it is a simple notification
or if it requires approval by regulators; b) what is defined/ encompassed in the
concept of algorithm to be notified; and c) the disclosure level of detail and potential
leakage of commercially sensitive information.

3. The required minimum resting period, which the EP wants to be fixed at 500
milliseconds. Instead of fulfilling the well-intended objectives, this requirement could
instead put buy-side firms at risk if they are obliged to hold positions for a certain time.
Remco Lenterman, FIA EPTA
In order for a financial (HFT) firm to be competitive today, it needs the best technology. This
is a direct result of fragmentation, which itself is the result of a political decision to foster
competition in markets. And the more competitive a firm becomes, the more orders it places
and inevitably the more unexecuted orders also. Fragmentation and lower tick sizes has thus
increased the number of unexecuted orders, which are thus not as it is widely alleged a
direct consequence of HFT. The phenomenon of HFT has been existing long before.
Olle Schmidt, MEP (ALDE, Sweden)
Commissioner Barnier has put more than 25 new financial regulations or revisions on the
table. It may be questioned whether this is not too much. But all these reforms have on
unique and overarching objective that is to bring trust and confidence back to the markets,
which is a pre-condition for growth. For example, the requirement suggested by the EP to
install a 500 milliseconds resting time may seem arbitrary but is a concrete and
understandable figure for ordinary people (a half second).
It will be interesting to closely follow the outcomes and impacts of the new HFT legislation
introduced in Germany by the Bundestag, although the whole markets may change
significantly when the new Financial Transaction Tax (FTT) is in place.
At EU level, the MiFID proposal will likely be discussed this autumn among the three
institutions. HFT is one of the important issues.

ROUND OF QUESTIONS BY MODERATOR
The moderator asked about the view of the panellists on the potential unintended
consequences of HFT regulation on market activities.
Remco Lenterman started by highlighting that legislators should be careful when categorizing
a trading practice as abusive without clear evidence. Technological developments and
evolutions on markets are not easy to keep pace with at legislative level so that should be
done cautiously. In particular, he insisted that HFT did not cause the flash crash and should
not be considered responsible for it. To this, Ari Burstein replied that the purpose of
regulation is not to put the blame of anyone in particular, and that concerning the flash crash
measures had been taken to deal with inefficient market structures in the US. However, the
high increase of cancelled orders and the negative impact on liquidity caused by
fragmentation and HFT practices to some extent have to be addressed. The revision of MAR
is not directed at any firm or company in particular, but as a safeguard against those which
are creating noise and deteriorating investorsâ&#x20AC;&#x2122; confidence. Remco acknowledged that

regulation has clearly not kept in pace with markets’ evolution and new algorithms, and that
some supervision could be necessary.
The moderator then asked the opinion of the panellists on the proposed requirement for
disclosure of algorithms and whether this rule intended to increase investors’ protection could
in the end have opposite results.
Maria Teresa Fabregas Fernandez started by insisting on the fact that the requirement in the
Commission proposal was only that algo strategies are presented to competent authorities,
and not at all that they be analyzed and authorized by them. The EP and Council have no
intention either to shift responsibility of algo traders to authorities. The objective of this
requirement is to discipline these traders and ensure that algorithms are compliant with
legislations. Without such a rule, the competent authorities would be unable to keep track on
new algorithms and react in time in case of suspicious practices. On the issue of potential
leakages highlighted by Juan Pablo Urrutia, Ms Fabregas Fernandez highlighted that to date
authorities do already receive a lot of confidential information and no issue has ever arisen.
Mr Urrutia followed-up on what was said agreeing that it would not be adequate to shift
responsibility on the approval of algorithms but that other legal requirements should maybe
be considered in order to ensure more responsibility. Indeed, he believes that it might be
difficult for competent authorities to have genuine supervision and insights by simply
receiving this information.
QUESTIONS FROM THE AUDIENCE
Geert Vanderbeke (ABN Amro Clearing) asked whether the initial “big idea” for financial
reforms, i.e. to raise more capital on markets and increase (foreign) investors’ interests, was
still driving negotiations; and whether misleading media representation was at the origin of a
widespread perception of complexity.
Maria Teresa Fabregas Fernandez answered that the key motivation for every single
initiative and reform is to restore investors’ (EU and non-EU) confidence in markets and
increase financing to the real economy. She also insisted that reforms at EU level do not take
place in a vacuum. The EU is integrated into global financial markets. Concerns around HFT
exist in countries all over the world, as are legislative reforms to address them. The
International Organization for Securities Commission (IOSCO) is dealing with the issue and
establishing guidelines at global level. Remco Lenterman then reacted by highlighting the
different perspectives leading reforms in the EU and US on a number of issues such as
resting time, order cancellation, and quoting obligation. Finally, Olle Schmidt said that the
blame should not be put on the media. When the financial world collapsed in 2007 none even
the experts could explain what had happened. Reforms undertaken at EU level are intended
to address this complexity; they are not the cause of it.
David Reed (Kreab Gavin Anderson) asked about how policymakers should strike the right
balance between principles that become hardwired in level 1 legislation and hence difficult to
change – and implementing legislation (level 2) which is a better place for more detailed
requirements should any be needed, and which can more easily be reviewed and amended

in light of the pace of technological advancements. He cited the Parliamentâ&#x20AC;&#x2122;s proposal for a
minimum resting period as an example where it appeared strange to put such a level of
technical detail into a level 1 Directive.
Remco Lenterman agreed and added that by imposing ever stricter requirements (order
cancellation charges, minimum resting time, continuous quoting obligations etc), legislations
will make electronic firms a very unattractive business. This, consequently, will make it more
advantageous to trade over-the-counter (OTC trading) as this trading method has much
more freedom under currently revised texts. Ms Fabregas Fernandez replied that the
objective of the Commission is on the contrary to bring all trades on regulated venues. Ari
Burstein recognized that this is a delicate task for the Commission. These are market
problems that should ideally be tackled by market based solutions but in the absence of
those it is the role of policy makers and legislators to come up with the best possible
solutions.